The Small Business Administration is proposing to change the way it calculates the number of employees a company has for purposes of determining whether it meets the size standards for governing eligibility for federal small business programs. Under the new rule, SBA would no longer calculate a firm’s average number of employees based on a rolling average over the
preceding 12 months but instead would base the size calculation over the last three completed years.

Under the rule the size calculation would be based on a company’s calendar year submission of IRS Form W-3, “Transmittal of Wage and Tax Statement” which would relieve SBA from reviewing payroll records. If a W-3 form was not used in one of the three relevant years, the SBA can use other information such as payroll records to show total number of employees. If a company has not been in business for three calendar years, the average number of employees would be calculated based on an annualized figure for the time it has been in business. For non-employee size standards, the SBA currently requires firms to submit their IRS tax returns that show receipts, net income, net worth and financial assets that it says has worked out well.

The SBA states it will now allow firms to calculate its employee size only once a year which would apply until the beginning of the next calendar year. The policy also coincides with new concerns by the Central Contractor Registration (CCR) and On-Line
Certifications and Representations (ORCA) to have contractors update their size status annually. Proposals to use a company’s total number of employees for only its last calendar year were rejected because “trends fluctuate over a period of years.” Also earlier proposals to use full time equivalents as a way to calculate employee size were rejected because it raised the specter of “endless disputes and size status protests” in how to calculate FTEs (Fed. Reg. 41240).

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